# Enter these losses in the space below and adjust the balance sheet to reflect the loan defaults.

## You have raised \$10 million from investors to open a bank.

You have raised \$10 million from investors to open a bank.

Question
You have raised \$10 million from investors to open a bank
. You get to decide how aggressive you want to be in attracting deposits
. 1
. You must choose whether you want to be conservative or aggressive – you can take in \$90 million or \$240 million in deposits
. Enter this amount on the balance sheet below (for deposits)
. 2
. You need to hold 5% of your deposits in reserve
. Enter this amount on the balance sheet below (for reserves)
. 3
.Now you can loan the rest
. Enter this amount on the balance sheet below (for loans)
. 4
. Risk is about the random probability of possible outcomes
. So now you need to roll the dice
. If you get a six, congratulations, you have no losses
. Otherwise, the number on your die is the percentage of loans that go bad
. Enter this number in the space below
. 5
. Calculate the dollar amount of loan losses
. Enter these losses in the space below and adjust the balance sheet to reflect the loan defaults
. 6
. You earn interest of 4% on producing (non-defaulted) loans
. Enter this number in its space
. 7
. Your operating cost is 1
.5% of deposits
. Enter this number in the space below
. 8
. Profit is revenue minus expenses
. You have two costs to consider, operating cost and defaulted loans that you need to write off
. Enter your profit in the space below
. 9
. Finally, on the class discussion board, post (1) whether you are aggressive or conservative, (2) your percentage of loan losses, and (3) your profit
. 10
. Look at all of the posts
. What do you learn about the decision to be aggressive versus conservative
.

____________________’s Bank Assets

Assets Liabilities

Reserves ? Deposits ?

Loans ? Capital \$10

Loan loss percentage: _____?___ Loan loss in dollars: ____?_____ Loan revenue: ____?______ Operating cost: ____?_____ Profit:_____?____

CommentYou have raised \$10 million from investors to open a bank
. You get to decide how aggressive you want to be in attracting deposits
. 1
. You must choose whether you want to be conservative or aggressive – you can take in \$90 million or \$240 million in deposits
. Enter this amount on the balance sheet below (for deposits)
. 2
. You need to hold 5% of your deposits in reserve
. Enter this amount on the balance sheet below (for reserves)
. 3
. Now you can loan the rest
. Enter this amount on the balance sheet below (for loans)
. 4
. Risk is about the random probability of possible outcomes
. So now you need to roll the dice
. If you get a six, congratulations, you have no losses
. Otherwise, the number on your die is the percentage of loans that go bad
.Enter this number in the space below
. 5
. Calculate the dollar amount of loan losses
. Enter these losses in the space below and adjust the balance sheet to reflect the loan defaults
. 6
. You earn interest of 4% on producing (non-defaulted) loans
. Enter this number in its space
. 7
. Your operating cost is 1
.5% of deposits
. Enter this number in the space below
. 8
. Profit is revenue minus expenses
. You have two costs to consider, operating cost and defaulted loans that you need to write off
. Enter your profit in the space below
. 9
. Finally, on the class discussion board, post (1) whether you are aggressive or conservative, (2) your percentage of loan losses, and (3) your profit
. 10
. Look at all of the posts
. What do you learn about the decision to be aggressive versus conservative
.

____________________’s Bank Assets

Assets Liabilities

Reserves ? Deposits ?

Loans ? Capital \$10

Loan loss percentage: _____?___ Loan loss in dollars: ____?_____ Loan revenue: ____?______ Operating cost: ____?_____ Profit:_____?____

Comment

You have raised \$10 million from investors to open a bank.

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